Chesapeake Energy Corporation (CHK) Stock: Is It Time To Take Profits?

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The recent rally in energy prices has given Chesapeake Energy Corporation (NYSE:CHK) new life. August was a tough month for CHK stock investors. Shares slid from the major psychological level of $5, ending its skid near $3.50 inside of 30 calendar days. It has since rallied, but should new buyers below $4 or old investors trapped at higher prices think about punching out?

Chesapeake Energy Corporation (CHK) Stock: Is It Time To Take Profits?Let’s trade CHK stock before we peer into the fundamentals. Throughout the course of 2017, we’ve seen CHK take out several vital support levels. From March through May, $5 was strong support. In June, that level faltered, but $4.75 quickly took its place. $4.50 was emergency support that came into play more than once this summer. But once that level was gone, so, too, was CHK stock.

After bottoming out near $3.50, shares are on the rise, but questions linger with CHK stock now near $4.40. Will prior support ($4.50) turn into resistance? At least in the short-term, that’s my expectation.

chk stock chart
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Source: Chart courtesy of StockCharts.com

Oil and natural gas will be the big driver. Chesapeake is exposed to both, and oil’s rally has helped boost the entire energy sector. We’ve seen it in the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE), and in individual stocks like Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX) and others. Natural gas is still down month-to-date, but is back a bit its August lows. If this commodity can find legs, CHK should continue higher as well.

With crude oil trading near its May highs around $52 per barrel, how much upside could be left, though? And not to make a 16% rally seem like a bad thing, but even if natural gas gets moving, $3.50 is likely its maximum upside. Yes, oil could get back to its early-2017 highs in the upper $50s and CHK stock could get through $4.50. The odds, technically speaking, just don’t favor betting on it until they clear possible resistance.

Where Does That Leave Chesapeake?

A further rise in energy prices will help Chesapeake, but perhaps not to the degree some would expect. If anything, the lift to the energy sector may be what benefits CHK stock the most.

In any regard, the company’s hedged a bulk of its production. “Approximately 74% of our remaining projected gas production [is] hedged at $3.09 per mcf and approximately 60% of our remaining projected oil production [is] hedged at approximately $50.32 per barrel.” Management has also hedged a “meaningful portion” of its 2018 gas production at $3.09, while 2018 oil hedges (no amount specified) is hedged at just under $50 per barrel.

Thanks to a recent, post-Hurricane Harvey update, we know that production didn’t take too big of a hit from the storm. Chesapeake management still plans on a significant production boost in the fourth quarter, mostly in the Eagle Ford and Powder River basins.

On the plus side, shares trade with a forward price-to-earnings (P/E) ratio of just 5.8. In the last two quarters, the company has shown positive net income. Last quarter’s net income of $494 million was impressive, particularly for a company with a ~$4 billion market cap. Last quarter, revenue was up an impressive 42% year over year (YoY).

There is bad, though. While first-quarter debt fell approximately 10% from the prior quarter to $9.5 billion, that figure increased in the most recent quarter to $9.85 billion. This is also a YoY increase. Worse, CHK’s cash position fell to just $13 million in the current quarter, from $249 million in the prior quarter.

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In Q1, CHK had positive operating cash flow (OCF), but through two quarters of this year, that now sits at -$58 million. Free-cash flow is also in negative territory through the first two quarters.

The Bottom Line on CHK Stock

On the surface, Chesapeake may have positive net income and a deceivingly low P/E ratio. If everything goes its way, CHK stock will go higher. But investing comes down to odds. Could a pair of twos win a hand of hold’em? Sure. But I like the odds of a flush or a straight far more.

That’s what CHK reminds me of. OCF and FCF are going in the wrong direction. Cash, total assets and total debt are too. Oil could run into some resistance and so, too, could CHK stock. Without a spurt from natural gas, what else do the shares have?

Positive net income is good and a low valuation is great. But I need more than that to get long CHK.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.


Article printed from InvestorPlace Media, https://investorplace.com/2017/09/chesapeake-energy-corporation-chk-stock-is-it-time-to-take-profits/.

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